PSalerno's  Instablog

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Private full time investor since 1994, graduated in medicine, with interests in art and philosophy coming from Italy and living in Hungary, dealer in old masters painting until 1996. Overcame 2 big market crashes in 2002 and 2008. The strategy is to divide the assets in 2 categories: the first... More
    Dec 11, 2012 11:17 AM

    Several analysts are negative about McDonald MCD, citing European problems, but this is not really the case.

    Other companies in different sectors like S, Jude, Baxter, or Medtronic MDT, can be more affected and in this case European problems are overlooked.

    Countries like Greece, Spain, Italy are cutting spending in healthcare sector. Monti, Italian PM, already cut 600 millions € for 2012 and 1 Billion for 2013.

    The system will be unable to buy the more expensive and modern medical supplies and will turn back to the less expensive and older products.

    On the other side, MCD is offering low cost meals, potentially taking market share from more expensive restaurants.

    In the following picture, we can see the downward trend of the same store sales for MCD in 3 different areas.(click to enlarge)(click to enlarge)

    What is remarkable is that in the last year Europe was the least affected area, less than US and APMEA, with a decline of a little over 2%, compared to about 6% decline in US and 7% decline in APMEA.

    Additionally, most of that decline is caused by a temporary negative currency effect.

    So, my conclusion is that European problems are overstated for MCD, and the stock deserves a recession resistant status, showing also some price flexibility.

    There are problems of course, like the possible spike in commodity price next year, especially meat, the anti-American sentiment spread in the APMEA regions by military operations, some bad managed restaurant in franchise.

    The stock is still in downtrend since the beginning of 2012.

    However this downtrend is nearing a strong support level at 80$ level, where the long term uptrend line is situated.

    (click to enlarge)

    Also the MACD and RSI indicators are showing a bullish divergence.

    Actually PE is 16.8, but with the stock priced at 80, PE would be 15, an attractive entry point.

    Debt is manageable, cash flow is good and the 3.5% dividend is safe in the actual conditions.

    Recent increased November same store sales gave some upside to the stock yesterday, but the downtrend could resume as there is a resistance line showed in the chart.

    My opinion is that the downtrend is ending, may be not before year end, most probably some time next year.

    With a long term time horizon, accumulating the stock in the low 80s looks like a good strategy.

    Disclosure: I am long MCD, MDT.

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